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Chapter 7 Key Terms
Vocabulary for Chapter 7 of CASE & FAIR
22
Economics
Undergraduate 1
02/18/2007

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Term
firm
Definition
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. most firms exist to make a PROFIT.
Term
perfect competition
Definition
industry structure in which there are
(1) Many firms with no control over prices (2) Production of identical / homogeneous products (3) Free entry / exit
Term
homogeneous products
Definition
undifferentiated products; products that are identical to, or indistinguishable from, one another.
Term
profit (economic profit)
Definition
difference between total revenue and total cost
Term
total revenue
Definition
amount received from the sale of the product (quantity x price)
Term
total cost
Definition
(1) out of pocket costs
(2) normal rate of return on capital
(3) opportunity cost of each factor of production
Term
out-of-pocket costs
Definition
explicit costs, accounting costs
Term
economic costs
Definition
full opportunity cost of every input; implicit costs
Term
3 Decisions All Firms Must Make
Definition
(1) how much output to apply
(2) which production technology to use
(3) how much of each input to demand
Term
normal rate of return
Definition
rate of return on capital that is just sufficient to keep owners and investors satisfied. (for relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds)
Term
short run
Definition
period of time when:
(1) firm is operating under a fixed scale (fixed factor) of production
(2) firms can neither enter / exit an industry
Term
long run
Definition
period of time when
(1) there are no fixed factors of production––firms can increase / decrease scale of operation
(2) new firms can enter and exit the industry
Term
basis of decision making for firms
Definition
(1) market price of output
(2) techniques of production that are available
(3) prices of inputs
Term
optimal method of production
Definition
production method that minimizes cost
Term
production technology
Definition
quantitative relationship between inputs and outputs
Term
production technology
Definition
quantitative relationship between inputs and outputs
Term
labor intensive technology
Definition
technology that relies heavily on human labor instead of capital
Term
capital-intensitve technology
Definition
technology that relies heavily on capital instead of human labor
Term
production function (total product function)
Definition
numerical / mathematical expression of a relationship between inputs and outputs. it shows units of total product as a function of units of inputs.
Term
marginal product
Definition
additional output that can be produced by adding one more unit of a specific input, ceteris parabis
Term
law of diminishing returns
Definition
when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
Term
average product
Definition
average amount produced by each unit of a variable factor of production
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